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FLSA Refresher: DOL’s Wage and Hour Rules for Tipped Employees

Temperatures aren’t the only thing on the rise this summer. Wage and hour lawsuits brought by service industry employees are heating up—particularly in the food service and hospitality sectors—leading to significant and costly legal exposure. In response, the U.S. Department of Labor (DOL) implemented strict rules regarding tipped employees as part of its aggressive stance against wage and hour violations. Unfortunately, given the technical nature and nuances of these rules, employer compliance can be anything but simple. To keep the heat down in your kitchen this summer, read on for a brief summary of the DOL’s proper tip pooling and service charge practices.

What is a tip credit?

Under the Fair Labor Standards Act (FLSA), tipped employees are those who customarily and regularly receive more than $30 per month in tips (this amount may vary by state law, click here for state specific information). The DOL takes the position that tips are the property of the employee, and as such, the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool. Specifically, section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13 under federal law) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13). Employers should note that certain state laws have required cash wages that differ from the federal standard (i.e., Pennsylvania’s required cash wage is $2.83 rather than $2.13) (for further information on minimum hourly wages for tipped employees by state, click here). If an employee’s tips combined with the employer’s direct (or cash) wages do not equal the minimum hourly wage, the employer must make up the difference.

Must an employer provide notice to a tipped employee before the employer may use the tip credit?

Yes. The employer must provide notice (oral or written—but we recommend always doing so in writing) to its tipped employees of the following:

the amount of cash wage the employer is paying a tipped employee;

the additional amount claimed by the employer as a tip credit, which cannot exceed the difference between the minimum required cash wage and the current minimum wage;

that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;

that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and

that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

What happens if an employer does not provide the employee with advance notice of the tip credit?

Failure to provide the above notice will result in serious repercussions. An employer who fails to provide the required information cannot use the tip credit and therefore must pay the tipped employee at least full minimum wage and allow the tipped employee to keep all tips received. From a practical standpoint, such a failure can nullify the employer’s past use of the tip credit and require the employer to go back and reimburse the employee for the tip credit taken.

What are the rules for a valid tip pool?

The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, and janitors—and may not include participation by members of management. Inclusion of the latter employees invalidates the tip pool and may require the employer to reimburse the tips to the employees who customarily receive tips and jeopardize the use of the tip credit. Further, the employer must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.

What happens to the tip credit if an employee works dual jobs for the employer (i.e., maintenance person by day and waitperson by night)?

The DOL explains that when an employee is employed by one employer in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips. For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. However, where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties.

Are there state law considerations for tipped employees?

Yes. Employers should always check state and local laws because these laws may differ significantly from the FLSA. For example, some states (including California, Colorado, Nevada, New Mexico, Oregon, and Washington) prohibit deductions from credit card tips for processing fees charged by the credit card companies. Further, local ordinances, such as Philadelphia’s gratuity-protection bill, may preclude owners and managers from recouping employees’ gratuities on credit-card sales to cover processing fees charged by the credit card company. To the contrary, the DOL takes the position that where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage. For instance, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. (Note: this charge on the tip may not reduce the employee’s wage below the required minimum wage, and the amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.)

Similarly, certain states (i.e., Massachusetts and New York) have laws regarding compulsory service charges (i.e., a minimum of 15 percent of the bill for large parties) which differ from the FLSA. Under New York law, for example, all monies received as service charges must be distributed to service employees unless the employer provides clear, written notice to customers that the charge is not a gratuity. Whereas under the FLSA, a compulsory service charge is not presumed to be a tip; rather, such charges are part of the employer’s gross receipts.